Share this article

HOW THIS IS MONEY CAN HELP

Many young people have to save hard to get on the housing ladder after years of soaring property prices, while they also remain under pressure from student debt and rent.

But those who do save for retirement in their youth will eventually gain outsize benefits from doing so, due to the compounding effect which works most to people's advantage over longer periods.

What is compounding?

Compounding is what happens when interest and/or investment returns are added to your savings, after which you earn them on the larger combined sum.

As this process of adding returns is constantly repeated over the years, it eventually boosts your pot to what can seem massively improbable sums to you at the outset.

Read more here about how compounding makes savings grow exponentially, when given enough time.

The successful Government pension auto enrolment initiative means people who don't opt out will benefit from compounding, without needing to understand how it works.

The Nottingham study found that under-40s are overestimating how much the state pension is worth, with one in four believing it currently pays £10,000 or more a year.

The full flat rate state pension for those retiring after April 2016 is £164.35 a week, or just over £8,500 a year.

But the building society said the main reasons for under-40s not saving into a pension was their focus on paying off debt, with some 22 per cent wanting to get out of the red before investing for retirement.

A slightly smaller number said they preferred to spend their money than save for old age.

Numbers using the Lifetime Isa were too small to be included on the list of main savings and investing accounts and schemes available below.

Number crunching: Where are under-40s choosing to save? (Source: Nottingham Building Society)

Lifetime Isas allow under-40s to save for a home and retirement at once, and the Government is offering free top-ups worth up to £32,000 if you max out your fund during your younger to middle-aged years.

However, financial experts say they are a inferior retirement product when compared with a workplace pension - although they can benefit savers who simply empty their pot on buying a home.

Auto-enrolment rules mean employers have to pay into pensions, which means people forgo free money by sticking with a Lifetime Isa instead of squeezing the maximum contributions possible out of an employer. Read more here about the pros and cons if you are considering a Lifetime Isa.

Nottingham’s director of member services, Tina Hayton Banks, said: 'It’s refreshing to hear so many under-40s have developed a savings habit and are disciplined about putting away money each month but disappointing that they’re clearly not as committed to pensions.

'With an aging population that sees people living longer, many will experience a retirement shortfall if they don’t pro-actively prepare whilst they are young and this generation will need to do more due to rising house prices and changes in state pensions.

Nottingham Building Society surveyed more than 1,000 under-40s last month.

Do you want to automatically post your MailOnline comments to your Facebook Timeline?

Your comment will be posted to MailOnline as usual

We will automatically post your comment and a link to the news story to your Facebook timeline at the same time it is posted on MailOnline. To do this we will link your MailOnline account with your Facebook account. We’ll ask you to confirm this for your first post to Facebook.

You can choose on each post whether you would like it to be posted to Facebook. Your details from Facebook will be used to provide you with tailored content, marketing and ads in line with our Privacy Policy.